Credit

Learning Objectives
After completing this chapter, youll be able
to:

1. Define Credit.
2. Know the difference between good and bad
debt.

What is Credit?

Saturday Night Live

What is Credit?

Your credit goal is to obtain a good credit score!

Why Its Important

Youll probably borrow money (use credit)
some day. When you do, it will be helpful
to know what credit is and the types of
credit you can use.

What is Credit?
Credit is an agreement to get

now
in exchange for a promise to
pay in the future.
money, goods, or services

Credit: The Promise to Pay

The one who lends money or
provides credit is called the creditor.
The one who

borrows money
or uses credit is
called the debtor.

Credit is a Loan (borrowing

money)
How much do you know about borrowing
money? Take the car loan quiz.

http://auto.howstuffworks.com/buyingselling/applying-car-loan-quiz.htm

Credit Costs you Money

Creditors charge a fee for using their
money, which is called interest.

What is Debt?
There are people who are debt free. It does happen.
But, sometimes, it is not possible to be completely
debt free. You may need to borrow money to buy a
house, finance a car, or pay for your college
education. It is important to know what type of debt is
good, and what type of debt is bad. Eventually all
debts will need to be paid back to the creditor with
interest.

What is Debt?
Debt is money that is owed. You could owe money
to your parents, friends, or a credit card company.
There are many businesses and people that you
could borrow money from and need to pay back.

Staying out of debt is a financial goal.

A debt occurs when a creditor loans money to a
debtor and the borrower agrees to pay that
person, business, or company back, usually with
interest (additional money). The lower the

interest rate, the less money you will

need to pay back to your creditor.

How much money will credit cost

you?
The amount of interest is based on
three factors:

Interest Rate
Time of the loan
Amount of the loan Principle

I = PxRxT

For example, if you took out a loan for $1000 and

the annual (yearly) interest rate was 10%, then you
would owe $1100 at the end of the first year. (1000
x .10 x 1 = $100). $100 is the amount of interest
(additional money) you owe for the loan of $1000.
(You also have to pay back the $1000).
But, if the annual (yearly) interest rate was 5%,
then you would owe $1050 at the end of the first
year. ($1000 x .05 x 1 = $50.)
Credit scores help determine what your interest
rate is, but well get to that later.

How much will credit cost you?

Its important to shop around for credit
because creditors may charge different
rates.
BMO Harris

Cary Bank

Chase

Auto Loan

3%

3.5%

6%

Home Loan

5.2%

5.5%

4%

Personal
Loan

6%

6%

6.5%

Home Equity

7%

6%

5%

A lower rate means lower cost (interest) to you.

How much will credit cost you?

Interest rates change daily.
BMO Harris

Cary Bank

Chase

Auto Loan

3.7%

3.5%

4.3%

Home Loan

6.2%

5.38%

4.98%

Personal
Loan

8.5%

8.3%

8.4%

Home Equity

9.3%

8.7%

7.65%

The day you finalize your loan you should lock in

your rate IF you applied for a fixed

rate loan.

How much will credit cost you?

Variable rate loan changes on a periodic (monthly,
yearly) basis.
BMO Harris

Cary Bank

Chase

Auto Loan

3.3%

3.2%

3.3%

Home Loan

5.8%

5.3%

4.7%

9%

9.2%

9.4%

8.68%

8.54%

7.73%

Personal
Loan
Home Equity

If the rate of your loan goes down, you get the lower rate
until the next change. If the rate of your loan goes up, you
get the higher rate until the next change.

Which type of loan does the interest rate

stay the same?
A. Fixed
B. Variable

Why should you shop around for credit?

To find the
lowest interest
rate so you can
save money.

Credit
Learning Objectives
After completing this chapter, youll be able
to:

1. Distinguish between good debt and bad

debt.
2. Know the advantages and disadvantages
of credit.

Debt The amount of money you owe

Before you can learn how to build, manage, and use credit,
it is important that you know about debt.

Determining the difference between good and

bad debt and learning the right time to finance
something is the key to your financial wellbeing.
Protecting your credit, using caution when banking and
preventing identity theft will help prevent money troubles in
the future.

Complete Worksheet

Good Debt
Before you begin to think about good debt, it is always
important to remember to never let debt get out of hand. If
you spend within your means and do not finance things you
will never be able to pay back, then some amount of debt is
alright. Incurring good debt can also increase your credit
score, which will help you buy expensive items later on.

Buying a home that you can afford is an example of a good debt.

Good Debt
Good debt includes necessities that you cant afford to pay
for up front. Buying a car to get to your job or purchasing a
home to live in are examples of taking on good debt. Good
debt is debt that increases your personal wealth in some
way. Good debt can also help your credit score. Because
public transportation in the United States may not get you
everywhere you need to go, personal transportation may
be a necessity in order to manage life. While cars
depreciate (decrease in value with time), they allow their
owners to earn a living and manage other aspects of their
lives. Homes generally increase in value over the long
spans of time and are considered an investment.

Good Debt
What about a college education? On average, according to
the College Board, a private four year university tuition
costs $30,094 annually (yearly) and a public four year in
state resident college tuition costs $8,893 a year.

In addition to tuition, there are

also room and board charges as
well as books and other fees.

Good Debt
Not everyone can afford to pay that much money per year
for an education. Student loans are an alternative but it is
always wise to never borrow more than you will be able
to pay back. Remember, investing in college is investing in
your future. The average college graduate will earn over
$1 million more than someone who just has a high
school diploma, during their lifetime. Thus, college loans
are generally considered good debt since they generate
income in the future for those who use them to gain a
degree.

What is an example of Good Debt?

1. House

2. Cary
3. School Loan (only what you need)

Complete Worksheet

Bad Debt
Bad debt is when you finance things that you consume
and do not have the money or a plan to repay the debts
within a reasonable amount of time. A car or home is a
lasting item, and it doesnt just disappear when you use it.
You can also use these things to increase your overall
wealth. However, when you use your credit card to

pay for your dinner night after night, you will

then need to pay off something you already
consumed and cannot get back.

Bad Debt
Credit cards are generally seen as a bad debt because of
the things that credit cards are usually used to purchase.
Buying a new outfit each week will accumulate debt and a
large balance at the end of the month. Most people cannot
afford to pay off their credit card bill each monththats

when it becomes a bad debt. Bad

your overall credit score.

debt will hurt

Bad Debt
What if you want to go on vacation? Do
you really want to spend the next 10
years paying off a vacation you took
one summer? No, so it is generally
unwise to go into debt to pay for a
vacation.

Vacation Cost $2,000

Bad Debt
Once the vacation is over, money
cant be saved for the next vacation
since the consumer is still paying
for the first vacation.
Secondly, making payments to a
credit card company increases the
cost of the vacation (because of
the added interest payments) and
then makes it more difficult to take a
second vacation.

Save for the Vacation

It is much better to make payments to a
vacation savings account and then go
on vacation, than to take a vacation and
then make payments to a credit card
company.

Turning Bad Debt into Good Debt

If you use your credit card to pay for all of your food, clothing, and other

, if you can
pay your balance off in full each month.
items during the month, it can be a good debt

This can happen with proper budgeting and if you have already the
money set aside for the credit purchases you make. It is good debt if
you already have the money and using credit just makes life easier.
Paying off your credit cards each month actually increases your credit
score.

What is an example of Bad Debt?

1. Consumables (food, drinks)
2. Entertaining friends
3. Purchases you dont need (clothes)

4. Vacation

Figure
25.1

Advantages vs. Disadvantages

C
R
E
D
I
T
ADVANTAGES

DISADVANTAGES

Credit
Learning Objectives
Students will be able to:
1. Explain the advantages and disadvantages
of using credit.

Who Uses Credit?

The type of credit used by people for
personal reasons is called consumer
credit.

Who Uses Credit?

Credit used by a business is called
commercial credit.
When businesses borrow
money, they often pass along
the cost of credit to consumers
by charging higher prices on
their products.

Who Uses Credit?

The federal government uses
credit to pay for many of the
services and programs it provides to
its citizens.

National Debt

Who Uses Credit?

State and local governments use credit to pay

highways,
public housing, stadiums,
and water systems.
for such things as

Why should I use credit?

There are some things in life that you just cant have if you
dont have credit, such as major purchases for big ticket
items or airfare, hotel, car rental.

Advantages of Credit
The main advantage of credit is that its

convenient.
Credit is especially useful in an

emergency.

Advantages of Credit
Without credit, there are some things you
cant buy.
Make a major
purchase.

Advantages of Credit
If you don't like to carry large amounts of
cash with you or if a company doesn't
.
accept
cash purchases (for example
most airlines, hotels, and car rental
agencies), putting purchases on a credit
card can make buying things
easier.

Advantages of Credit
It helps establish a credit history.

Using credit wisely establishes a good

credit rating. A credit rating is a
measure of a person's ability and
willingness to pay debts on time.

Advantages of Credit
A good credit rating tells other lenders
that you are a responsible borrower and a
good credit risk.
A good credit rating leads to
guaranteed loan at a low interest rate.

Advantages of Credit
You can take advantage of sales.
Some stores offer special

sales for

credit card customers only.

Advantages of Credit
Credit helps you keep

your spending.

track of

Advantages of Credit
Credit contributes to the growth of our

economy.

More people are able to spend money

now and pay in the future.

What is an Advantage to Credit?

1. Convenient

2. Make a major purchase

3. Easier to buy things
4. Establish credit history
5. Credit rating
6. Special Sales
7. Keep track of spending
8. GDP goes up helps economy

Disadvantages of Credit
The more items you charge and the
longer you take to pay off your credit
cards, the more you pay in interest.

Disadvantages of Credit
You may be discouraged from
comparison shopping thus paying
higher prices for items.
Some places even charge more for an
item if you are using credit.

Disadvantages of Credit

Credit contracts

(rules) may
be difficult to
understand.

Disadvantages of Credit
Overuse leads to a poor credit rating.

Disadvantages of Credit

Your future
income is tied
up repaying
previous debts.

Disadvantages of Credit

Late or missed payments lower

your credit rating, which will make it
difficult for you to get credit in the future.

What is disadvantage to Credit?

1. Pay interest if you dont pay it off on time, in full.

2. Pay higher prices

3. Difficult credit rules
4. Overuse = poor credit rating
5. Future income pays past debts
6. Late or missed payments = lower
credit rating.

Questions?

End of

Learning Objectives
Identify the different types of credit.

Lets learn how to get the most of the

advantages of credit by differentiating
the types of credit.

Types of Credit
Short-term loans last for one year or
less.
Medium-term loans last for one to five
years.
Long-term loans last longer than five
years.

Types of Loans

Vehicle Loan

House Loan
Student Loan

Signature Loan
Credit Card and
Cash Advance

Personal Loan

Payday Loan

Vehicle Loan
If you dont have enough money saved to
buy a vehicle, you might want to finance the
vehicle (get a loan).

Banks and other financial institutions may

offer you a loan. This is a secured loan,
because the vehicle will be used as
collateral. If you dont make the loan
payments (delinquency), the bank can
come and repossess (take away) your car
and resell it to someone else.

Lets Buy a Car

Only
$6,999

You have saved $1,000.

That will be your down
payment for the car.
$6,999 - $1,000 =
$5,999.

2006
Chevrolet
Impala

The $5,999 is the

principal amount you will
need to borrow (get a
loan).
How much will this loan
cost you?

Calculating the Finance Charge

The amount a loan costs is known as the
finance charge. This charge can be calculated
by using the following formula:
Finance Charge = Principal x Interest Rate x
Time

Finance Charge = Principal x Interest Rate x Time

The higher the Interest Rate the more money you will owe
in finance charges.
The longer the Time period the more money you will owe in
finance charges.
Principal

Interest Rate

Time

Finance
Charge

Home State
Bank

$5999

2.69%

$484.12

Chase Bank

$5999

2.69%

$645.49

Harris Bank

$5999

2%

$839.86

Which bank is offering you the lowest finance charge? That

is the bank you should get your loan from to purchase your
car.

How much is the Finance Charge?

Finance Charge = Principal x Interest Rate x
Time
Finance Charge = $5,999 x 2.69% x 3
Finance Charge = $484.12

This is your total

finance charge. How
much it will cost you
to borrow this money
for 3 years at the
2.69% interest rate.

Only
$6,999

2006
Chevrolet
Impala

Car Payment
Your car loan is known as an Installment
loan because this loan will be repaid in
regular (same amount) payments over a
period of time.

How much will you pay each month?

You have to repay $5,999 plus the $484.12 in total
finance charges.
$5,999 + $484.12 = $6,483.12.

Car Payment
You will make equal monthly
payments, to cover the amount of
the loan and the interest.
$5,999 + $484.12 = $6,483.12.
$6,483.12 / 36 months = $180.09 (rounded up)
Only $180.09
per month
(with $1,000
down)

2006
Chevrolet
Impala

Which type of loan is a 5 year car loan?

A. Short term
B. Medium term

C. Long term

Buying a House

House/Property Vocabulary
Land, houses, & condominiums are forms
of investments.
Buy low and sell high!
Equity means how much ownership
you have in your home
Down payment amount you pay in cash
to reduce your monthly loan payments
Interest amount you pay the bank for a
loan

House/Condo Loan
A home loan is known as a mortgage. This loan is a
secured loan because if you dont repay the loan on time
every month, the finance company can repossess (take
back) your home and resell it to someone else
(foreclosure).

The interest rate on a home loan is usually the lowest

rate for any secured loan because the value of the

home is higher than any other secured loan, such as a car.
If the creditor repossessed your home because of failure to
pay, they would most likely recover their losses from your
lack of payment.

Fixed Loan vs. A.R.M. Loan

Mortgage long term property loan
Typical length is 15 or 30 years
(click here) Calculator (see how much interest you
pay on a $200,000 House)

Fixed Mortgage your interest rate never

changes and the monthly payment remains the
same
A.R.M. (Adjustable Rate Mortgage)- your
interest rate can fluctuate based on market
conditions
See article (click here for article)

Interest on a $160,000 loan 30 year fixed loan mortgage

Which type of loan is a 15 year mortgage?

A. Short term
B. Medium term

C. Long term

Home Equity
Home Equity the difference between the
market value of your home (what it could
sell for) and what you owe in loan(s) on
the home.

Equity Example
Cost of House

Down Payment
(paid in cash)

Total Loan
Amount (minus
down payment)

Interest on 30
year mortgage

$200,000

$20,000

$180,000

5%

Since you paid $20,000 in cash you now

have $20,000 of equity in the House.
If your home is worth $250,000 after 5
years and you owe $175,000 on your
mortgage loan, you now have $75,000
of equity in the house. ($250,000 $175,000 = $75,000)

The principal for your loan is $180,000 so

the bank is going to charge you 5% interest
for borrowing that money.

Refinance a Loan
Click here to watch a video.

Refinance reduce your monthly payments by obtaining a

lower interest rate
If you initially take a loan out for $180,000 from a bank at
a 5% rate
You can refinance
and if your credit
score is high, you can
get a lower rate.

Interest rates are LOW

right NOW so it is a good
time to refinance

5%

This will save you

money because you
will pay the bank less
money in interest on
your loan

3.5%

Refinance
You can refinance your:

Mortgage loans
Car loans
Boat loans
Student loans

Interest rates are low now

because the government
wants us to SPEND money
to help the economy

The goal is to get a lower interest rate to

SAVE money!

Student Loan

Government
Student
loan interest
is low.

A student loan is an unsecured loan and is designed to

help students pay for college tuition, books, and living
expenses. It may differ from other types of unsecured
loans because the interest rate is lower. There is less risk
of the student not paying back this loan. All student

loans must be paid back. You cannot declare

bankruptcy on this loan.
Students do not have to start paying on this loan until they
have completed their education.

Personal Loans
Banks or other financial institutions may offer
you a personal loan. You can use this money
for

personal reasons.

This is an unsecured loan, so therefore the

interest rate will be higher than for a secured
loan.
Unsecured
Loan

Personal Loan

High
Interest

Personal loans are often used to pay down and consolidate

debt on high interest credit cards, cover emergency or
unexpected expenses, medical bills, home
improvements bills, moving costs, weddings, paying
taxes, and more.

This is an unsecured personal loan, with no collateral

being promised in consideration for the loan. The creditor
is usually known by the financial institution lending the
credit. For example, they may have a checking or savings
account at the bank in which they are obtaining credit.
Although the interest rate is higher than it is for a secured
loan, it wont be as high as a signature loan or cash
advance loan.

Signature Loan
This is an unsecured loan often used for small purchases
such as computers, and vacations.
An unsecured loan means the lender relies on the
borrower's promise to pay it back. Due to the increased
risk involved, interest rates for unsecured loans tend to
be higher than they are for secured loans.

This type of loan is usually obtained by creditors whom are

not known very well. Their credit report will not be
analyzed before they receive the credit. Because of these
risk factors, the interest rate on this loan will be higher
than on a personal loan.

Which of the following loans offers

the lowest interest to an excellent
creditor?

A. Personal
B. Government Student Loan
C. Signature

Charge Accounts
One of the most common types of
short-term and medium-term credit is
the charge account.

Charge Accounts
The three main types of charge
accounts are:
Regular
Revolving
Budget

Regular Charge Accounts

If the bill is paid on time, you dont
have to pay interest.

If you dont pay the entire bill,

interest is charged on the
amount that hasnt been paid.

Revolving Charge Accounts

A revolving account allows
you to borrow or charge up to
a certain amount of money
and pay back a part of the
total each month.
Interest is charged on
the unpaid amount.

House payment $1500.00 per

month

Budget Charge Accounts

Budget charge accounts let
you pay for costly items in
equal payments spread out
over a period of time.
4 payments of
$75.00 each

$300

Each payment includes

part of the total due on the
item and sometimes
includes interest.

Which of the following is not a type of

charge account?
A. Budget

B. Convenient
C. Regular

D. Revolving

Which of the following credit

accounts always offers no interest?

A. Regular
B. Revolving
C. Budget

Credit Cards
Credit cards are like charge accounts
but some can be used in many
different places.

Credit Cards
The three basic types of credit cards
are:

Single-purpose
Multipurpose

Travel and entertainment

Single Purpose Card =

Seller-Provided Credit
Many stores provide credit
for their customers.
One of the reasons they
provide such credit is to
make it easier for
consumers to buy their
products.

Single-Purpose
Cards

NO INTEREST
if paid in full
before the
due date

Single-purpose cards can only be

used to buy goods or services at the
business that issued the card.

Multipurpose Cards

NO
INTEREST if
paid in full
before the
due date

Multipurpose cards are also called

bank credit cards because banks
issue them.
Multipurpose cards are designed
to work like a revolving charge
account but you can pay it off in
full each month when it is due and
make it a regular charge account.
NO INTEREST.

Single-Purpose Card

Multipurpose Card

3% Rule
3% of transaction remains
with the seller (store).

3% of transaction goes to
the multipurpose card
company.

You purchase an item for $100.00. You use

a multipurpose credit card. The multipurpose
credit card company ONLY pays the store
$97.00. The store loses $3.00.

Cash Advance on a Credit Card

Cash Advance Loan

A cash advance is a cash loan from a credit card, using an
ATM, a bank withdrawal or "convenience" checks. The
interest rate on cash advances is usually the highest for
any type of loan.
Money obtained for cash advances can be used for anything.

Credit Cards
Some credit cards
have annual fees,
which might range
from $25 to $80.

Credit card companies earn

money from the interest they
charge. Interest rates vary.
VISA

Travel and Entertainment Cards

Travel and
entertainment cards
usually work like regular
charge accounts.
You must pay the full amount
due each month. NO
INTEREST. You will have an
annual fee.

If you are looking for a credit card that can be

used at many different places, you should
apply for which of the following cards?

A. Single Purpose
B. Multi Purpose

C. Travel and Entertainment

D. All of the above

Credit Card Offers

How many credit card offers do you think a family
of 4, with excellent credit and has 2 small home
businesses, will receive in one year?

Single Payment Loan

The debtor pays back
this type of loan in one
payment, including
interest (at the end of
the loan period).

Installment Loan
Installment loans are loans repaid in
regular payments over a period of
time.
The debtor makes
equal monthly
payments, which
cover the amount of
the loan and the
interest.

Which of the following types of loans would be

an installment loan?

A. Mortgage
B. Vehicle Loan
C. Revolving Charge Account
D. All of the above

What is the difference between a

single payment loan and an
installment loan?
A. A single payment loan is
paid in 1 payment and
includes interest.
B. An installment loan is
paid in equal payments.
C. Both A&B

Questions?

End of

Activity: Types of Loans

Directions: Match the loan in the first column with the
expected interest rate in the second column.
Hint: secured loans have lower interest rates.
Loan

Expected Interest Rate

1. Car

A. 19%

2. House

B. 17%

3. Student (Government
Loan)

C. 2.25%

4. Personal

E. 2.69%

5. Signature

F. 6%

6. Cash Advance

D. 14%

Activity: Types of Loans

Answers

Loan

Expected Interest Rate

1. Car
E

A. 19%

B. 17%

2. House

C. 2.25%

3. Student

D. 14%

4. Personal

E. 2.69%

5. Signature

F. 6%

6. Cash Advance

Repossession Justin Timberlake

Featuring:
Ashton
Kutcher

Learning Objectives
After completing this chapter, youll be able
to:

1. Name the places where you can get credit.

2. Compare and contrast credit places and
choose the lowest interest.

Where do you borrow money from?

1.
2.
3.
4.
5.
6.

Banks
Savings and Loans
Credit Unions
Finance Companies
Payday Advance
Pawnshops

Making the right decision on where to borrow

money from, can save you money (interest
money).

Banks and Other

Financial Institutions
Financial institutions, such
as banks, savings and
loans, and credit unions
offer many types of loans.
Lowest interest rates
available IF you have
and excellent credit
report.

Banks and Other

Financial Institutions
More demands on the borrower,
but worth it because the interest
rate should be as low as
possible.

Paperwork
1.

Application

2.

Check stubs

3.

References

4.

Tax forms

Consumer Finance Companies

Consumer finance
companies specialize
in loans to people who
might not be able to
get credit elsewhere
because of their poor
credit record.
Since you are riskier the
interest rate goes up.

Consumer Finance Companies

Read the disclaimer at the end of this commercial.

Payroll Advance Services

If you dont have
any savings and
an unexpected
expense occurs,
you might look for
a short-term

loan until
payday.

Also known as
Borrow Until Payday Loan
A payday loan is made without a
credit check but you must have proof
of a checking account and employment.
These places charge higher interest
(because you have extremely poor
credit),

Payroll Advance Services

You write a check to
them for $300 that they
can cash on your next
pay day (1 week) and
they give you $270
today.

Not secure
because your
check might
bounce.

$30 in interest for a loan for 1 week! Thats 10%

interest a week.

Borrow Until Payday Loan

These businesses provide very short-term
loans, usually for 7 to 14 days.
The interest on this kind of loan gets higher because of
the additional time.

Pawnshop Loan
A pawnshop loan is based on the
value of something you own.

interest of this type of loan is very high

depending on how long you leave your
items at the pawn shop.
Generally, the

Pawnshop Loan Procedures

Stolen
items not
accepted!

Pawnshop Loan
Although the interest at a Pawnshop is the
highest for any loan, some people
continue to use a Pawnshop over and over again.

Pawnshop Loan Court Case

If you have good credit and want a low

interest loan you should apply at which of
the following places?
A. Bank

B. Payday advance
C. Pawnshop

D. American General Finance

Why is it important to have a good credit

rating?
It shows that a consumer is a responsible
borrower and a good credit risk.

Activity: Places to Get a Loan

Directions: You need a $2,000 car loan that you can repay
in full with interest in 6 months.
Match the place to get a $2,000 car loan in the first column
with the expected interest rate in the second column.
Expected Interest Rate
1. Bank

A. 3%

2. Pawn shop

B. 15%

3. American General
Finance

C. 50%

4. Payday Advance

D. 10%

Activity: Places to Get a Loan

Directions: You need a $2,000 car loan that you can repay
in full with interest in 6 months.
Match the place to get a $2,000 car loan in the first column
with the expected interest rate in the second column.
Expected Interest Rate

Loan
1. Bank

2. Pawn shop

A. 3%
B. 10%

3. American General
D
Finance
4. Payday Advance

C. 25%
D. 6%

Secured vs. Unsecured Loans

Secured

Unsecured

Borrower pledges some asset (a

car, house, or other property) as
collateral for the loan

The borrower does not pledge an

asset to be used as collateral for
the loan.

If the borrower doesnt repay the

loan as promised the creditor can
take possession of the asset
used as collateral and may sell it
to regain some or all of the
amount originally lent to the
borrower.

If the borrower doesnt repay the

loan as promised the creditor
cannot take the borrowers
possessions. However, the
creditor can seek legal action
against the borrower to try to
obtain the money.

Interest rate for borrowing money

for a secured loan is usually
lower than an unsecured loan.

The interest rate for borrowing

money for an unsecured loan is
usually higher than a secured
loan.

Examples: car, boat, motorcycle,

house.

Examples: student loan,

computer, vacation, medical bills.

True Life: Im in Debt

Click on the link below to watch the video.

Credit Cards

Take Notes

Credit
Learning Objectives
After completing this chapter, youll be able
to:

1. Complete a credit card application.

2. Understand how to use a credit card wisely.

Credit Card Terms

Credit
Interest

Credit Limit
Annual Percentage Rate
Finance Charge
Annual Fees
Minimum Payment
Due Date
Late Payment Fee
Cash Advance Fee

College Credit Video

1. What does the credit card company offer to college

students which makes its card appealing to the students?
2. How does the college benefit from allowing the credit card
company to solicit on campus?

3. List on criticism that either of the two parents said about

the credit card companies?
4. What explanation did the bank, university, or credit card
solicitor give to justify their action of marketing credit cards
to college students?

Figure
26.1

CREDIT CARD SOLICITATION

Prairie Ridge
High School Student
Dear Student:

First Bank of PR

Applying for Credit

To open a credit or
charge account,
youll have to fill out
an application form.

Figure
26.1

CREDIT APPLICATION

When you sign the bottom of the

credit application, it allows the
creditor to access financial
information about you from a credit
bureau.
How old must you be to apply for this
credit card?

Applying for Credit

Security agreement.

This is the most

important piece
of information
and is required
by law. Most
people dont read
it.

Annual Percentage Rate

The annual percentage rate (APR)
determines the cost of your credit on a
yearly basis.

Changes in Interest Rates

In many cases, a credit card might offer a low introductory
rate. This is known as the teaser rate.

After a few months, the rate goes higher (after youve

accumulated debt.)

Figure
26.1

SECURITY AGREEMENT

0% for 6 months.
16.99% Variable (That
means it changes
periodically. Could go
up or down.)

Why should you beware of low

introductory interest rates?
They are a teaser to get you to
use the credit card. If you dont
pay your balance off in full, the
interest rate increases after a
few months.

This will cost you

money!

Other APRs

Default Rates: You did

not pay the minimum
payment on time.

Figure
26.1

SECURITY AGREEMENT

Default Rate: (YOURE

LATE ON A PAYMENT)
Up to 21.99% variable
for purchases; up to
28.99% variable for
cash advances.*

Changes in Interest Rates

With a variable rate, the rate changes
as interest rates in the banking system
change.

With a fixed rate, the interest rate

always remains the same.

Figure
26.1

SECURITY AGREEMENT

Purchases - Prime Rate + 13.74% - it

may always be over 13.74%
Purchases Default Prime Rate +
18.74% - it may always be over
18.74%
Cash Advances Prime Rate +
20.74% - it may always be over
20.74%
Cash Advances Default prime Rate
+ up to 25.74% - it may always be
over 25.74%

Method of Computing the Balance for Purchases

Figure
26.1

SECURITY AGREEMENT

Figure
26.1

SECURITY AGREEMENT

Cash Advance: 23.99%

Interest rate until you
pay this money back.

Minimum Finance Charges

A minimum finance charge
could be added to your
credit card if you carry a
balance. This is similar to a
processing fee for
calculating your statement,
mailing it to you, etc.

Figure
26.1

SECURITY AGREEMENT

.50

Other APRs
Cash Advances You go to the bank
and charge cash.

Figure
26.1

SECURITY AGREEMENT

Cash Advance: 23.99%

Interest rate until you
pay this money back.

Fees
Figure
26.1

SECURITY AGREEMENT

Cash Advance 5%

for each cash

advance, with a
minimum of $10 and
NO MAXIMUM.

Figure
26.1

SECURITY AGREEMENT

Cash Advance Transaction Fee:

5% for each cash advance.
$1000x.05 = $50
Harris Bank bills Credit Card Company
$1050

You pay $100 next month.

Your new Principal is $950

I=PxRxT
How much interest do you owe?

Fees
With a cash advance you borrow
money on a credit card rather than use
it to make a purchase.
There is often a
separate fee for a cash
advance.

It cost me
$50.00 extra to
get this money.

Annual Fee
Figure
26.1

SECURITY AGREEMENT

No Annual Fee

Annual Fee
In some cases, you have to pay an
annual fee just to have the credit card.

This fee is paid every year and is just

part of the privilege to have the card.

Fees
A late or missed
payment fee is
charged when you
miss a payment or
dont make a
payment on time.

Figure
26.1

SECURITY AGREEMENT

Late Fee: $19 on

balances up to $250
and $39 on
balances over $250.
You pay
interest on
this late fee.

What are some types of fees credit

cards charge?
Late payment
Missed Payment
Cash Advance

Annual Fee

Grace Period
The grace period is amount of time you get
to pay off a debt without having to pay
interest charges.

Use credit to
your
advantage.

Figure
26.1

SECURITY AGREEMENT

25 days after the

close of each billing
period. NO
FINANCE CHARGE
if you pay IN FULL
by the due date on
your current billing
statement.

Rewards
In some cases, you earn rewards
based on how much you CHARGE
on your card.

Use credit to
your
advantage.

Rewards
1 reward point
for each dollar
charged on
credit card.

Rewards

Cash is credited to my credit card

account. Can be used towards
future purchases.

NBC 5 Credit Card Signatures - Video

Credit Card Review

Credit Card Offer

2015

Credit Card Offer

This is the amount of
interest you will pay
for any purchase
balances not paid in
full by the due date.

2015

2015

The interest rates on

this credit card are
variable (they can
change).

Cash Advances is the interest rate

you will pay for using your credit
card at a bank or at an ATM and
borrowing money.

Grace Period You

have 25 days to pay
your balance in full from
the time the bill is
mailed to you and then
you will not have to pay
interest.
Annual Fee: This is the amount of money
you must pay each year to the credit card
company whether you use the card or not.

If you do not pay your credit card bill in full

by the due date, then the minimum amount
of finance/interest money you will pay is .50
cents, even if the balance multiplied by the
rate of interest is lower.

Credit Card Application

New
Credit
Card
Law
2010

or the APR will be calculated on the balance

(amount you dont pay) and you will owe more
money.

Note: If you cannot pay the balance in full, pay

as much as you possibly can to keep the interest
charges as low as possible.

Evaluate these Credit Card Offers

Which one
would you
choose?

Credit Worthiness

Learning Targets
After you have completed this unit, you
will be able to:
Explain what creditors look for in
applicants when they apply for credit.
Identify the 5 Cs of Credit.
Explain the Equal Credit Opportunity Act
(ECOA).
Evaluate credit applications and decide
whether to approve or deny credit.

Your Credit Worthiness:

The Five Cs
There are several factors
creditors consider before
giving you credit, which
are usually referred to as
the five Cs of credit.

Your Credit Worthiness:

The Five Cs
The five Cs of credit are:

1.
2.
3.
4.
5.

Character
Capacity
Capital
Collateral
Credit History

Credit History

Character
Creditors might ask for credit references from businesses
or people youve borrowed from in the past who can testify
to your reliability when you fill out a credit application.

Do you
move
around
a lot?

If this section is
left blank, you
may be denied
credit. Complete
as much of it as
you can.

Capacity
Creditors will also consider your capacity to pay
back the credit before they decide to give you
credit.

job

Creditors will check to see whether you have a

,
how much money you make, and how long youve been
employed when considering your capacity to repay the
loan.

Capital
Your capital is how much
you have beyond what you
owe. It is also known as your
assets.

A creditor will want to know if you

have valuable assets such as
personal property, investments,
or savings with which to repay
the debt if income is unavailable.

Capital

Own

Retirement

$30,000

Savings

$4,000

Stocks

$10,000

Collateral
Collateral consists of property,
or valuables. It can be used as
security for a loan.
If you fail to pay back a loan, the
creditor can take whatever you
pledged (agreed to on the loan
document) as collateral, such as
a car, jewelry, or house and resell
it to try to get their money back
that you owe them.

Credit History
The creditor then checks with a credit bureau, which
is an agency that collects information about you and
other consumers of credit. The credit bureau report
tells whether you pay bills on time and how much
you owe.
There are 3 authorized credit bureaus:
1. Trans Union
2. Equifax
3. Experian

All 3
credit
reporting
agencies

You have the

right to 1 free
credit report
every year
from each
agency.

40 Million Mistakes: Is your credit report

accurate?
Click on the picture below to view the video.

Your Credit Report

The only
FREE way to
get your
credit
report.

Credit Report Commercials

Equal Credit
Opportunity Act

The Equal Credit

Opportunity Act (ECOA)
ensures that all consumers
are given an equal chance
to obtain credit. This

doesnt mean all

consumers who apply
for credit get it.
Factors such as income, expenses, debt, and credit history are considerations for
credit worthiness.

Equal Credit Opportunity Act

Consumers cannot be denied credit because of:

Gender, marital status (widowed, separated, divorced,

single, married), age, race, national origin, because
they receive public assistance income (welfare), or
because they do or do not have children or how many
children they have.
Consumers can be denied credit because of:
1.Low income
2.Large current debts
3.Poor record of payments in the past

Questions?

End of

Discussion Activity: Evaluate Credit Applicants

Directions: Each applicant
described on the next two
pages has applied for a $4,000
loan to purchase a more fuelefficient car.
Imagine you are a loan officer at the bank, and you must
decide whether to approve or deny loans for each of the
four applicants. You have been given five pieces of
information about each applicant. Using this information,
evaluate each applicants ability and willingness to repay
(use the 5 Cs of credit) and make the best decision you
can. Approve or Deny each applicant. Consider the ECOA
law in making your decision. Explain your answers in a
discussion.

Credit Applicants
Applicant 1

Applicant 2

1. Has 10 open charge

accounts

1. Annual income of
$25,000

2. Address has not

changed for 5 years.

2. Caucasian

3. Has 6 children
4. 62 years old.
5. Owns stock.

3. Behind on paying
installment loan
4. Owns or is buying a
home
5. Has an overdrawn
checking account.

Credit Applicants
Applicant 3

Applicant 4

1. Receives a welfare
check (money from the
government) each month

1. 21 years old

2. Has no credit history

2. Divorced

3. Has been at present job

for 10 months

3. Pays bills on time

4. Has a savings account

4. Works part time

5. Mexican-American

5. Female

Questions?

End of

Learning Targets
After you have completed this unit, you
will be able to:
1. Explain what to do if you are having
credit problems.

Credit Problems
What can you do when you have a credit problem
or when youve gone too far in your use of credit?
If you cant make your credit payments the first
thing you should do is contact the creditor and
explain the situation to them. They may be able to
work out a plan that will make your payments
easier. (They may even stop charging interest).

Credit Counseling
Credit Counselors help consumers with their credit
problems.
They can help you revise your budget, contact
creditors to arrange new payment plans, or help
you find other sources of income.

Consolidating Debts
A consolidation loan combines all your debts into
one loan with lower payments.
Monthly Credit Payments
Kohls
Shell
Menards
Target
Visa
Master Card
Total

$50.00
$75.00
$100.00
$60.00
$325.00
$180.00
$790.00

Interest on these credit payments

ranges from 10-20%. Current balance
to pay off all this credit is $7500.00.

You can go to a bank and get a personal loan for

$7500 at a lower interest rated and pay off all these
creditors. Your bank monthly payment should be
much lower than the total for all these creditors.

Bankruptcy
The last resort is to declare bankruptcy.
This is a legal process in which you either
pay back your debts on a timed schedule or
dont pay back your debts at all.

You should get an attorney that specializes

in bankruptcy cases. You will have to pay a
fee to the attorney and to file the proper
documents at the federal court .

Bankruptcy
A federal judge will decide any of the following:
1. You pay back the debts in smaller amounts
which will take a longer period of time.
2. You do not pay back certain debts (complete
relief).

3. You give up (sell if necessary) your personal

assets, such as a car, savings, or business and
give the money to the creditors.
REMEMBER: You must pay back your student
loan.
Bankruptcy stays
on your credit
report 7-10 years.

Questions?

End of